Regulation

Buy-side warns SEC over short-selling disclosure

US buy-side industry body the Investment Company Institute has cautioned the Securities and Exchange Commission against recommending public, real-time disclosure of short-selling positions in a report to Congress, due before Friday 22 July.

“Such a reporting regime could create new opportunities for unfair or otherwise abusive market practices and impair overall investor confidence in the markets,” wrote Karrie McMillan, general counsel to the ICI.

The comments were made in response to a consultation that the SEC launched in May, as part of a study it is mandated to carry out under section 417 of the Dodd-Frank Act, on proposals to increase disclosure of short-selling positions.

The SEC asked for feedback on the feasibility, benefits and costs of reporting of short sale positions of listed securities, and of conducting a voluntary pilot programme in which public companies would agree to have all trades of their shares marked as either long, short, market maker short, buy, or buy-to-cover. Section 417 of the Dodd-Frank Act directs the SEC to consider either a transaction-reporting or position-reporting regime, the former published on the existing US consolidated post-trade tape, the latter to the public or to regulators.

McMillan said that while regulators must prevent short selling from being used as a vehicle to illegally manipulate stock prices or in any other abusive manner, “we do not see how publicly reporting such information in real time, as opposed to solely reporting the information to regulators, would significantly deter from achieving this goal.”

Jiří Król, director of government and regulatory affairs at the Alternative Investment Management Association, a UK-based hedge fund industry body, said that firms should have no issue with such private disclosure of short positions, “provided it is proportionate in terms of minimum thresholds and frequency and shows symmetry with the reporting requirement in respect of long positions,” and only if the case for a reporting regime were supported, which he said it does not appear to be at present.

Due to the high volume of data that would be reported, Janet McGinness, legal and corporate secretary at exchange operator NYSE Euronext, recommended that positions be reported on a net basis, using a two-tier system. This would allow daily reporting of positions to regulators, and public reporting over a longer timeframe, which should alleviate fears expressed by buy- and sell-side participants that their trading strategies would be revealed. She added that the pilot programme would be an opportunity to test out the different reporting models.

McMillan concurred, adding, “The ICI believes a pilot must include a range of issuers, including large, medium, and small cap issuers, chosen by the SEC to maximise the production of useful, empirical data.”